[IANACPA] without 83b election the $1M gain on stock options on the moment of exercise goes into regular income while the $1M loss would go into capital loss. The limit on loss offset to the income is $3K/year. So in the first year there would be $997K of regular income to pay taxes from and $997K carry over loss. Without any other capital gains to use the loss against, it would take another 333 years to write that loss down.
Suppose the stock market has a bad year. You sell a stock or mutual fund and realize a $20,000 loss with no capital gains that year. First, you'll use $3,000 of the loss to offset your ordinary income. The remaining $17,000 will carry over to the following year.
Next year, if you have $5,000 of capital gains, you can use $5,000 of your remaining $17,000 loss carryover to offset it. You can use another $3,000 to deduct against ordinary income, which would leave you with $9,000.
The remaining $9,000 will then carry forward to the next tax year. Assuming that you had no capital gains in the following three years, you could use up the remaining $9,000 loss, $3,000 at a time, over those three years.
The $3000 stacks as an additional deduction from income. But if you had capital gains of $100k, that can totally be offset with a remaining balance of $900k. You can chew away your capital loss carryover with capital gains faster than 333 years.
